Mrs Zhu is just the type of investor the Chinese government should worry about as it tries to engineer a turnaround in the country’s stock markets, whose massive swings have heightened fears for the country’s financial health.

One of millions of retail investors trapped by the market crash in June who prefer to hold losing positions rather than take a loss, Zhu is just waiting for indexes to rise so she can sell.

“I will sell all my shares tomorrow if there is a chance,” said the government clerk, who almost hit the sell button last week after markets had recovered somewhat from June’s slump. But because she was still set to take a loss, she held on.

“I am pretty sure that if the government does not come to rescue us, the situation will get much worse,” she said.

Zhu’s way of thinking is so common there a Chinese phrase for it. “Tao lao” once meant being captured by a lasso, but is now most commonly used to mean “trapped in the stock market”, which implies an investor cannot sell out of a losing position.

The logic is also the opposite of what wealth managers typically advise; better to take a loss and move the money into something likely to produce stronger returns.

This highlights the risk Beijing faces in sustaining a market turnaround. Every time the government succeeds in pushing up share prices, an army of retail investors jump in to sell at their break even point, immediately knocking back market confidence.

Given that retail investors conduct an estimated 80 per cent of trades, that means the government could face a long, hard grind before it can stabilise markets.

Chinese stocks more than doubled in the six months to May before crashing in June by more than a third, prompting a flurry of government inspired measures, including share buying, to stabilise prices. That calmed markets for most of July, before a sudden drop of more than 8 per cent on Monday – the biggest one-day fall since 2007.

“Monday’s plunge showed the Chinese authorities that even governmental measures have their limits. It’s anybody’s guess what else they can do to shore up market sentiment,” said Bernard Aw, a market strategist at financial spreadbetting company IG.

“GREEDY”

While investors who bought before mid March are still in the black thanks to previous gains, a Reuters analysis of public data shows that another 10 million investors opened new accounts since April, helping push up China‘s market capitalisation by a net $US4.5 trillion – until the bottom fell out in mid June.

Those figures do not include existing investors who added to their positions during this period, nor the famously stubborn holdouts who are sticking to loss-making positions that are years old.

Mrs Xu is one of them. She said she has been holding shares in China Life Insurance since 2007, when it traded for around 75 yuan ($US12.08) per share.

The stock gained a bit during the recent rally, at one point crossing over 42 yuan per share but then fell back to around 28, and Xu is still holding on.

“I thought I might be able to taking the losses back riding on this round of bull market, but it is still losing money so far,” she said, adding she is also holding onto loss-making positions she took earlier this year and plans to sell as soon as they break even.

“Maybe I am too greedy,” she said.

Both Mrs Zhu and Mrs Xu declined to provide their full names.

REUTERSAn investor looks at an electronic board showing stock information at a brokerage house in Jiujiang, Jiangxi province April 23, 2013.

LOSING PATIENCE?

To be sure, one upside for Chinese regulators is the “tao lao” mentality can slow selling in a falling market, explaining why there was so little popular outcry in June when nearly 40 per cent of listed companies halted trading in their shares so they could ride out the crash.

It could also explain why the government set a semi-official recovery target of 4,500 points for the Shanghai Composite Exchange, which would encourage investors who think this way to wait. The index closed on Tuesday at 3,662.81 points.

For Beijing, the biggest worry is that investors who were once patient are now so rattled by the big market swings that they are ready to accept losses just for peace of mind.

“Yesterday all my stocks hit limit down and I lost 20 per cent of my money. Today all my stocks fell limit down again!” said student Liu Fangrui.

“I managed to sell them all at a loss today, and so I lost 320,000 yuan in two days. I don’t have confidence on the market any more. I don’t want to get into the market again.”